The cost of firing is a cost of hiring

The days, weeks, and months go by, and the "labor emergency" continues. Solving it requires acting simultaneously on the short-term and medium/long-term levels. The latter is the most complex, but given that the labor market problem is structural (8.2–8.8% natural unemployment according to the Central Bank), it is where the most effort must be put. To begin with, the problem of the mismatch between the evolution of labor costs and productivity continues. In September, real wages grew 3.5% annually and have accumulated 43 months of increases. At another time this would be good news. Today, amid stagnant economic activity, it is part of the problem. It also shows that people's distress does not come from the wages of those who have jobs, but from the lack of employment. The Central Bank says this clearly in the latest IPoM. While unemployment in the OECD and Latin America is lower than before the pandemic, in Chile it is higher. And real hourly wages here grew well above the average of those countries. Labor costs per hour are now rising 8.9% nominally. Added to this is automation to which our workforce is more exposed than the OECD average. When labor becomes more expensive and technology becomes cheaper, companies hire less. The hardest hit are young people. Minister Rau has proposed, among other measures, an adaptability package: averaging the 40-hour workweek over 16 weeks, hourly contracts, and trial work. These measures go in the right direction, because flexibility is a way of lowering the cost of hiring without touching wages. However, the underlying, structural problem cannot be solved without lowering the cost of firing. In Chile that cost is high for three reasons. The first is severance pay based on years of service. The second is that a large share of dismissals end up in court. The third is that the courts tend to rule in favor of the worker. The result is that the employer does not know how much it will cost to end an employment relationship, but knows it will probably be expensive. A high cost of firing is, in practice, a cost of hiring. Anyone who hires during a recession, without knowing when demand will recover, is placing a bet. If losing the bet is costly and uncertain, they simply do not make it. They prefer to wait, hire on short fixed terms, or invest in a machine. Thus, the protection that favors those who have jobs is paid for with the unemployment of those who do not. Protecting the worker is legitimate, but it must be done without making hiring more expensive. A robust unemployment insurance, with individual accounts that gradually replace severance pay, protects the person and not the job, and eliminates the incentive to litigate. It is time to take that step. By Claudio Sapelli, Faro UDDNEWSLETTEROpinionSaturday, AMIdeas in tension, opposing views, and clear analysis: elements to uncover the issues that divide opinions and will shape the agenda. By signing up you are accepting the Terms and Conditions and Privacy Policies of La Tercera.